To Top 10 Nasdaq companies Loading... : Investor Sentiment and Bull/Bear Views

Friedberg argues that value creation in free markets follows a power law rather than a normal distribution: a few businesses with a better compounding engine keep accumulating share until the flywheel runs away, so a handful of names account for almost all capital appreciation. The investable conclusion he draws is to concentrate in those winners instead of buying the index. He cites analysis originally published by Gokul Rajaram showing that simply holding the top 10 companies in the Nasdaq and never selling produced roughly a 24x multiple over a 24-year period, far ahead of owning the Nasdaq itself, because an index dilutes the winners with the flat and down names that drag returns negative. He extends the same logic past the IPO: most of the equity value of a power law winner is created after it goes public, so the compounding engine is available to ordinary public-market investors and an IPO is only a transitionary event.

Value creation follows a power law and does not stop at the IPO. Palantir added roughly $420B of market value in its first five public years, Uber $120B, Spotify $120B and Facebook more than $2T, so most of a power-law winner's value accrues while it is public. Friedberg's data point is that simply holding the top 10 NASDAQ companies produced a 24x return over 24 years against about 9x for the index itself, so the job is to identify the compounding winners and own them in the public market rather than buy an index or, worse, the venture index, which he says returns negative.